NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A5422
SPONSOR: Brennan (MS) TITLE OF BILL: An act to amend the not-for-profit corporation law, in
relation to its recodification, reorganization, and overall operation of
non-profit entities in New York state; and to repeal certain provisions
of such law relating thereto
PURPOSE OR GENERAL IDEA OF BILL: To undertake a comprehensive revision
of the Not-for-Profit Corporation Law.
SUMMARY OF SPECIFIC PROVISIONS: Following is an outline of selected
revisions to the N-PCL proposed by the Corporation Law Committee of the
New York State Bar Association, This outline focuses on substantive
changes rather than amendments simply designed to conform to the Busi-
ness Corporation Law. The outline tracks the fifteen Articles of the
statute, summarizing proposals for significant changes in the first ten
Articles.
Article 1 - Short title; Definitions; Application; Certificates; Miscel-
laneous.
The title of the statute is changed from "Not-for-Profit Corporation
Law" to "Non-Profit Corporation Law," and shorthand citation is changed
from "N-PCL" to "NPCL"
Section 101. References to the Not-for-Profit Corporation Law or to
not-for-profit corporations are accordingly amended to reference the
Non-Profit Corporation Law or non-profit corporations throughout the
statute Chapter heading, and sections 102(a); 103; 202; 305(c): 402;
501: 503(c); 512; 804: 805: 807: 904: 906(d): 908; 910; 1003: 1304:
1309: 1310: 1311; Article 14 heading; 1401: 1411: 1412: 1406-a.
Revisions to Article 1 foreshadow substantive changes in Articles 2 and
4. In particular, references to "Types" are eliminated sections 103,
112-115. Definitions section 102 are renumbered in alphabetical order.
Three new definitions are added -- "assets received for specific
purposes," "charitable purposes," and "organized for charitable
purposes." Use of these terms throughout the statute is designed to
maintain clarity with respect to Attorney General and judicial oversight
in the absence of Types, focusing on the key elements for government
oversight: the presence of charitable purposes and assets raised for
specific purposes. The revised draft maintains judicial authority to
intervene in the event of misappropriation of corporate funds section
114. "Visitation of supreme court" but makes the provision applicable Jo
all not-for-profit corporations rather than only Types B and C corpo-
rations, an appropriate broadening of oversight.
"Assets received for specific purposes" is a term adapted from current
section 513, It encompasses donor-restricted funds as well as funds
resulting from institutional solicitations for designated uses. Subse-
quent provisions focus Attorney General and judicial oversight on
protection of such assets and their continued use for intended purposes.
The intent is to codify the developing practice within the State and
recognized by the courts that the directors or trustees of a charitable
corporation owe a duty of obedience to the corporate purposes of the
entity, assuring that assets received to advance those purposes are not
diverted without proper consent or court approval.
Requirements associated with agency approvals prior to Secretary of
State filing of certificates of incorporation are eliminated section
104. The new provision would maintain and facilitate regulatory authori-
ty in the absence of agency approvals. First, new statutory language
section 103-A expressly provides that incorporation under this statute
does not exempt an-entity from requirements of any regulatory law and
does not authorize any entity to do anything prohibited by law or regu-
lation. The intent is to mirror the approach in other jurisdictions and
provide the new corporation the opportunity to secure IRS recognition of
tax-exempt status and engage in critical planning and organizational
activities while also preserving the dominance of any state regulatory
regime with respect to activities subject to licensing requirements.
Article 2 - Corporate Purposes and Powers.
The primary change to Article 2 is the elimination of Types A, B, C, and
D. Thus definitions of Types and distinctions between Types are also
eliminated section 201. The provision is amended to prohibit any non-
profit corporation from conducting activities for pecuniary profit or
financial gain, except to support its other lawful activities, essen-
tially importing current section 204 into revised section 201.
The explicit power to establish conditions and requirements for member-
ship is added; section 202, foreshadowing clarification in Article 6 of
membership criteria and procedures. Provisions for dollar-limits associ-
ated with income-producing real estate; section 202 and restricted
transfer of real property to a member of the corporation; section 205
are deleted. References to subventions and capital contributions also
are deleted section 202.
Article 3 - Corporate Name and Service of Process.
Modest revisions are proposed for Article 3. The most significant change
section 301 would expand the options for required terms in the name of a
not-for-profit corporation. Currently, a corporate name must include the
word (or abbreviation of) "corporation," "incorporated," or "limited";
the draft revision adds "association," "club," "foundation," "fund,"
"institute," "union" or "society" to the list.
Article 4 - Formation of Corporations.
Article 4 is revised to eliminate the requirement to include designation
of Type A, B, C, or D in the contents of the certificate of incorpo-
ration of a not-for-profit corporation. The revisions further eliminate
the need to list names and addresses of initial directors in the certif-
icate. section 402. Conforming with BCL section 402(b), which is now a
well-accepted form of director protection, the revised Article 4 would
allow the certificate to limit personal liability of directors to the
corporation or its members - although not to third parties - for certain
breaches of duty. section 402. This limitation of liability will not
protect a director whose conduct involved bad faith, intentional miscon-
duct, knowing violations of law or receipt of an improper financial gain
or other advantage.
The revised Article 4 also streamlines the approval process for incorpo-
ration section 404. Under current law, prior to submitting a certificate
of incorporation to the Secretary of State, not-for-profit incorporators
in New York must first obtain written approval or consent from any other
state agency with jurisdiction over activity the corporation might even-
tually undertake pursuant to its stated purposes. Such approval is
required even if the corporation is formed in order to conduct prelimi-
nary planning, fundraising, and organizational activity short of the
substantive operation that ultimately would be subject to state regu-
lation or licensing; and, this agency approval requirement is triggered
by purposes stated in the certificate of incorporation, whether or not
the corporation ever operates in furtherance of such purposes. State
agency oversight is protected through the requirement that the new
corporation provide a certified copy of the filed certificate of incor-
poration to the applicable state agency following incorporation.
Accompanying this shift from agency approval to Secretary of State
notice is a provision section 404 echoing the new section 103-A, i.e.,
further reinforcing the regulatory application of other laws and affirm-
ing the authority of any governmental body to require a corporation to
obtain a license or permit legally required for conduct of specific
activities.
Article 5 - Corporate Finance.
Revisions to Article 5 simplify the framework for capital structure of
not-for-profit corporations by eliminating the "subvention," a subordi-
nated debt instrument unique to New York law sections 504-505. Although
the Committee expresses no principled opposition to subventions, it
assumes that use of more conventional subordinated debt instruments such
as promissory notes is adequate, less complex, and more consistent with
the capital structure of non-profit corporations in other states. This
change, if enacted, would require a mechanism to account for subventions
previously authorized and outstanding.
Also in Article 5, provisions for relative rights, preferences, and
limitations of capital certificates are clarified in conformance with
the BCL section 502. issuance of transferable membership certificates
section 501 or capital certificates section 502 would be permitted, if
so authorized in the certificate of incorporation or bylaws.
In Sections 510 and 511, judicial approval is required with respect to
applicable asset transactions by corporations formed for charitable
purposes or corporations that hold restricted assets.
These provisions reflect appropriate oversight of both charitable organ-
izations and restricted assets. Government oversight is broadened over
current law in that transactions by a corporation without charitable
purposes would be subject to judicial approval if the corporation also
holds restricted assets, which is an appropriate method to assure that
restricted assets are not endangered by the larger asset transaction. An
exception is added for transfers to constituent charitable corporations,
i.e. to charitable corporations controlled by or under common control
with the selling corporation.
Failure of the corporation to file required reports would subject the
corporation to an order of the Attorney General compelling such
report(s) to be filed within 60 days of such order. section 520.
Continued noncompliance following the 60-day period would give rise to
potential further action by the Attorney General for judicial dissol-
ution pursuant to Article 11. Greater focus on enforcing current law
appears to the Committee as a more efficient route than the heightened
standards for annual reporting by corporate officers reflected in numer-
ous legislative proposals since January 23, 2003 though the two are not
incompatible.
Article 5 contains several provisions arising out of New York's adoption
of its version of the Uniform Management of Institutional Funds Act
("UM1FA") back in 1978. UM1FA, like the N-PCL, is poorly suited to serve
the non-profit and especially the charitable sector after decades of
development, arid a successor act, the Uniform Prudent Management of
Institutional Funds Act ("UPMIFA"), had been proposed. At this early
juncture, while the Committee has several suggestions on how to improve
the N-PCL in this regard, to do so in light of the developments of UPMI-
FA would be premature. Continued attention will need to be paid to this
subject, given the continued large concentration of investment assets
within New York non-profits and the challenges posed by imaginative
investment vehicles.
Article 6 - Members.
Revisions to Article 6 enable any New York not-for-profit corporation to
designate itself as a membership or a non-membership organization.
(Under current law, Type B corporations may have members or not, but
other Types must have members.) A corporation with more than one class
of members must designate its multiple classes of members in the certif-
icate of incorporation section 601. Revisions further clarify the desig-
nation of events constituting membership termination.
The Article 6 revisions also clarify procedures for member meetings
meeting notices, rights of inspection, voting on bylaw amendments, and
other decision-making by the board or the members sections 602-603.
605-606. 610-611, 614, 621.
Article 7 - Directors and Officers.
Revisions to Article 7 maintain the current requirement that a not-for-
profit corporation have at least three directors section 102. With
respect to officers, however, it would allow one person to hold all or
any combination of the offices of president, secretary, or treasurer in
a one-member not-for-profit corporation section 713.
The draft revision deletes the "special committees" provisions contained
in paragraph (c). Those provisions have provoked considerable confusion
among organizations, including whether a special committee must be
composed exclusively of directors. The draft also, consistently, deletes
reference to "standing" committees. The revised section will authorize
committees of the board composed of three or more directors and commit-
tees" of the corporation" that need not be composed of directors. These
revisions make this section consistent with the parallel section in the
Business Corporation Law.
The draft revisions implicate fiduciary duties of directors and officers
section 717 with language parallel to BCL section 717(b). This
provision enables directors to consider the interests of a range of
stakeholder interests in the context of a potential change in control of
the corporation. A provision section 720-a imported from BCL section
402(b) allows the certificate of incorporation to limit certain liabil-
ity of a director to the corporation or its members, providing further
incentive to attract non-profit corporation directors. This provision
does not allow for limiting liability to third parties, nor does it
apply in the event of misconduct or undue personal gain by the director.
With respect to corporate transactions with interested directors, the
Committee notes that current law requires transactions to be fair or to
be approved by disinterested directors. Many nonprofit corporations rely
on beneficial business relationships with directors, and the N-PCL
section 715 sets adequate bounds without discouraging such relation-
ships. No further restrictions appear necessary, especially given Attor-
ney General authority currently for action against interested directors
pursuant to Article 7 and Internal Revenue Service authority to enforce
related restrictions under IRC section 4958.
Article B - Amendments and Changes.
Similar to Article 4 changes with respect to incorporation, the
revisions to Article 8 eliminate references to Types and, more notably,
requirements of state agency approvals prior to filing certificates of
amendment by the Secretary of State. section 804. This change recog-
nizes the reality that the conditions that society expects non-profit
organizations to address can and do evolve rapidly, yet the limitations
and delays inherent in existing law on corporations' ability to update
their corporate purposes impede them from fully benefitting society.
New language - section 801 provides that no amendment to a certificate
of incorporation can enable use of any assets received for specific
purposes in a manner inconsistent with such purposes, A new provision
new section 806(d) provides that amendment of purposes would not prevent
a corporation from applying assets acquired prior to such amendment to
such amended purposes, provided that the corporation abides by any gift
instrument for assets received for specific purposes prior to such
amendment. By those provisions, a corporation's ability to efficiently
update its purposes will not conflict with legal restrictions on then-
existing assets.
Modest changes also clarify the relative authority of the members and
the board of directors with respect to voting on amendments to the
certificate of incorporation or bylaws sections 802-803. Judicial
approval of certificates of amendment would not be required new section
806: formerly section 804, provided that corporate assets will continue
to be used for the specific purposes for which funds were given to the
corporation section 801. This provision conforms to recent repeal of
parallel judicial approval provisions in Article 4 governing formation
of Types B and C corporations.
Article 9 - Merger or Consolidation.
References to Types are deleted from Article 9
section 908. Further revisions to Article 9 add the power of a New York
not-for-profit corporation to merge, not simply with another New York
not-for-profit corporation, but also with a non-profit corporation in a
different state
section 901. Procedures for merger plan approval are clarified
section 903. Merger of any corporation that is organized for charitable
purposes and that holds assets received for specific purposes must be
approved by the supreme court
section 907, with opportunity for appearance and objection to the plan
by the Attorney General
section 907(b). Following such approval, the corporation must submit a
certificate of merger to the Secretary of State, who in turn notifies
state agencies with oversight of any of the corporation's purposes. Any
assets received for specific purposes prior to the merger will retain
such designation of use after the merger, except as otherwise directed
by the Supreme Court that approves the merger
section 905, Criteria for judicial approval are narrowed to focus upon
use of assets in accordance with specific purposes for which such assets
were received
section 907.
Article 10 - Non-Judicial Dissolution.
Revisions to Article 10 require approval of the Supreme Court for
dissolution of any corporation that is organized for charitable purposes
or that holds assets received for specific purposes (rather than apply-
ing to Types B and C corporations)
sections 1001. 1003, with opportunity for appearance and objection to
the plan by the Attorney General section 1003. As with the changes to
Sections 510 and 511, these changes reflect the appropriate exercise of
government oversight over charitable organizations and any non-profit
organization holding restricted assets.
Following any such judicial approval, a corporation would be required to
submit a certificate of dissolution to the Secretary of State who in
turn would notify state agencies related to any of the corporation's
purposes. Decision-making procedures with respect to dissolution are
clarified
section 1002. Procedures after dissolution are focused upon winding up
corporate affairs and assuring use of assets received for specific
purposes for such purposes
section 1005. Provisions for revocation or annulment of voluntary
dissolution proceedings are deleted sections 1010. 1012.
Article 11- et. seq.
The NYSBA has drafted no significant amendments to:Article 11 - Judicial
Dissolution; Article 12 -Receivership; Article 13 - Foreign Corpo-
rations; Article 14 - Special Not-for-Profit Corporations; Article 15
-Public Cemetery Corporations.
JUSTIFICATION: The Corporation Law Committee (the "Committee") of the
New York State Bar Association ("NYSBA") has initiated a process of
review and proposed revision of the N-PCL. Initially undertaken to
conform the N-PCL to the current Business Corporation Law in New York,
this process presents an opportunity to revisit and improve selected
provisions of the N-PCL, especially in light of the dramatic changes in
corporate governance throughout the sector in response to the Sarbanes-
Oxley Act. The Committee's analysis, in consultation with other experts,
has resulted in a comprehensive draft revision of the N-PCL, a statute
that has not seen extensive revision since its adoption over three
decades ago.
The non-profit sector in New York State is enormous and wide-ranging -
foundations and charities, health care organizations, service agencies,
clubs and neighborhood groups, cultural institutions, religious organ-
izations, research and educational centers, chambers of commerce,
economic development corporations, and more. The impact of the sector
and even certain of the entities within it is vital to the people and
economy of the State of New York. The Committee has benefitted from the
expertise of the many and varied parties engaged with the N-PCL - non-
profit directors, officers, and employees; lawyers and other profes-
sionals who advise non-profit corporations; interested committees of the
organized bar; government officials, including legislators, the office
of the state Attorney General, and the office of the Secretary of State;
and commentators and scholars.
The Committee's goal was to produce a revised statute that best serves
the public interest and the New York non-profit sector. The draft
revision compares favorably with comparable laws in other states and, if
enacted, will substantially reduce current incentives for organizations
in New York State to incorporate or move investment assets out of state,
reduce government burdens, and streamline nonprofit governance without
compromising oversight. The Committee's ongoing consultations with
respect to concurrent drafting initiatives -including work on the Ameri-
can Bar Association's Revised Model Nonprofit Corporation Act and the
American Law Institute's Project on Principles of the Law of Nonprofit
Corporations - further assure that New York's revised N-PCL will reflect
best practices nationally.
The NYSBA seeks a more consistent statutory framework for non-profit
corporations and business corporations in New York State. Such symmetry
will simplify the practice and interpretation of corporate law in the
state, particularly given the significant and growing overlap of non-
profit and business law practice. Substantial revision of the New York
Business Corporation Law in. recent years has not been accompanied by
parallel changes to the N-PCL. These N-PCL draft revisions conform where
appropriate to the BCL, including parallel articles and section numbers
as well as similar language in parallel provisions. Beyond conforming
the N-PCL to the BCL, the draft revisions reflect an effort to reduce
excessive barriers to formation and operation of not-for-profit corpo-
rations in New York, while maintaining sufficient government oversight
and emphasizing the fiduciary responsibilities of directors and offi-
cers. These proposed changes are the product of a generation's worth of
learning since the enactment of the original statute. For example,
unlike non-profit corporation statutes in most other states, New York's
N-PCL requires incorporators to obtain advance approvals from various
state agencies as a condition of incorporation. This denies organiza-
tions the opportunity to conduct planning and seek crucial federal
recognition of tax-exempt status while simultaneously securing state
regulatory approval to operate. A more streamlined approach, commonly
used throughout the U.S., is recommended by which incorporation can
occur but regulated activities cannot be conducted until appropriate
licensure is obtained. Other changes with respect to dissolutions of
not-for profit corporations have largely already been incorporated by
recent changes to the N-PCL - an indication of the recognized need to
modernize the statute without compromising the public interest.
The draft revisions eliminate many of the idiosyncratic provisions
unique to New York law, created at a time when the law in the field was
not as well developed and the legislature was grappling with amalgamat-
ing various model acts and the recently adopted BCL into a single stat-
ute. In particular, the draft revisions eliminate the designation of
statutory "Types" of not-far-profit corporations. The N-PCL definitions
of four types - A, B, C or D - create undue complexity in formation and
ambiguity at the borders between Types, disguise the impact of the
common and statutory law on charitable funds managed by corporations,
and provide potential dissonance with federal internal Revenue Code
("IRC") categories for tax exemption.
Elimination of Types would result in consistent statutory rules for all
non-profit corporations incorporated in New York, with targeted
protections for continued use of donor-restricted and charitable funds
for their intended purposes, a refinement that recognizes recent
enforcement actions by the Attorney General Charities Bureau and its
important oversight role in this area.
The Committee has given careful consideration to and received valuable
inputs with respect to the possible incorporation of various aspects of
the Sarbanes-Oxley Act into the N-PCL. The consideration of these
elements - required executive and audit committees; adoption of a code
of ethics; whistleblower and document retention/destruction policies;
verification or certification of financial statements and other filings;
auditor independence standards; and so on - has resulted in a varied and
vigorous debate in the non-profit and charitable communities nationwide.
The Committee, while sensitive to the importance of transparency and
protections against wrongdoing among not-for-profit corporation boards
and executives, has not incorporated these elements into the draft
revisions. Instead, the Committee has deferred to the approach taken by
the Attorney General Charities Bureau, and relied upon individual corpo-
rations to consider and adopt appropriate measures, consonant with
industry practice and their obligations to meet the standard of care
imposed by NPCL Section 717. The Committee expects (and invites) contin-
ued consideration of this approach as various constituencies around the
State comment on the draft revisions.
Finally, the NYSBA recommends changing the title of the statute to the
"Non-Profit Corporation Law," adjusting the reference to "NPCL." The
current title - "Not-for-Profit Corporation Law" italics added - was
intended originally to clarify that a corporation organized under this
statute is permitted to make a "profit" within the limitations of the
statute. That principle of law has come to be widely and well under-
stood, without regard to the title of the statute. indeed, the nomencla-
ture is unique to New York - another distinction which no longer makes a
difference and causes confusion even within New York but also, certain-
ly, as New York corporations deal with others around the country. Today,
in New York and elsewhere, numerous non-profit corporations engage in
commercial activity within the limits of state and federal law, making
net revenues in some instances but adhering to the prohibition on
distributing profit. Changing the title of the N-PCL to the Non-Profit
Corporation Law will provide for more succinct and understandable termi-
nology and will put New York in step with the doctrinal norm.
PRIOR LEGISLATIVE HISTORY: A11042 (2007-2008); A5855 of 2009-10; A5727
of 2011-12 - in Corporations committee.
FISCAL IMPLICATIONS: None to state or local government.
EFFECTIVE DATE: This act shall take effect immediately.
